Lessons From Dropbox - Part I: Was Steve Jobs Wrong?

So, was Steve Jobs actually wrong?

Game Changer?

Drew Houston started Dropbox in 2007, when he was busy with another startup – an SAT prep website – which he planned to work on during a bus ride from Boston (where he had studied at MIT) to New York. Except that, as the bus left the station, Houston realized he had forgotten his thumb drive. Frustrated, he spent the ride building a tool that synchronized folders across computers over the internet. He described it in his 2007 Y Combinator application, which is still considered a classic example of a successful startup pitch.

Despite initial pushback on Hacker News – why would anyone pay a subscription for something they could easily set up for themselves via FTP? – Dropbox was an immediate hit. The product addressed a real need and was easy to use. The referral program – offering 250 MB in free storage – created viral growth, with the user base doubling every few months. Within three years, 50 million people had created Dropbox accounts, and millions of new users were registering every month. It was a relatively cheap growth strategy: guaranteeing free storage space, rather than the traditional way of paying hundreds of dollars in direct advertising. As a result, Dropbox was highly profitable and cash flow positive, while employing roughly twenty engineers, and no sales or marketing staff.

Dropbox resembled another company, founded just three years earlier by another twenty-something out of Boston1: Facebook. Drew Houston seemed to follow in Mark Zuckerberg’s footsteps, and so did the growth curve. Just as Zuckerberg refused to sell Facebook for a billion dollars in 2006, Houston rejected “a high nine-digit sum” from Apple in 2009. That’s when Steve Jobs made his famous “feature, not a product” line.

“Shove over, Zuckerberg!” said the cover of Forbes magazine in 2011, when Dropbox raised $250M at a $4B valuation, with Houston featured under the title “The Next Game Changers”.

Reid Hoffman, LinkedIn founder turned VC, celebrated Dropbox in a 2019 podcast titled Take on Goliath — and win.

The framing is interesting: taking on Goliath. The Silicon Valley ethos is about disruption. Displacing incumbents. The word incumbent itself is practically a derogatory term in San Francisco, used to describe companies that are fat and lazy and somewhat evil, with management that prioritizes profit extraction over innovation. That’s how Steve Jobs himself used to paint IBM in the early 1980s (when Apple was challenging it with the Apple II and then the Macintosh), and Microsoft in the 1990s.

But does the Dropbox story fit the disruption narrative?

Hmm, Well. It certainly didn’t lose. Apple launched iCloud in 2011 (Jobs specifically called out Dropbox). Yet – contrary to Steve Jobs’s 2009 threat – it didn’t kill Dropbox. Neither did Google Drive or Microsoft’s OneDrive. Dropbox users didn’t churn, and new users kept signing up—albeit at a slowing pace, until hitting a ceiling in 2023.

Dropbox, however, didn’t exactly win either; it raised money at a $10B valuation in 2014, and went public for slightly less than that, four years later2. Its current enterprise value is slightly above $10B. Twelve years of work, while the valuation remained flat. Apple, meanwhile – the Goliath, which was already the world’s most valuable company in 2014 – saw its valuation rise over 7x since then, recently hitting five trillion dollars. Dropbox failed to capture any of the value created during the golden age of SaaS.

How to take on Goliath and win is clearly the wrong takeaway; but what is the right lesson?

Winter Is Coming

“This is a very special episode that I suspect founders will be studying for years to come,” is how Lenny Rachitsky introduces his interview with Drew Houston in early 2025. It’s indeed remarkable, though not for the reason he means. Houston is brutally honest about his mistakes and how badly they felt—not a typical “crushing it” founder interview. But he ends up drawing exactly the wrong conclusions.

The episode describes three eras of Dropbox: “The first era of, you’re killing it,” Rachitsky starts with the hypergrowth Dropbox experienced during 2007-2014. “And there’s the second era, which I’ll just say, everyone’s trying to kill you.” ‘Everyone’ being big tech, the incumbents. Houston gradually came to see that – despite the encouraging numbers – the incumbents were holding the high ground:

It was this dissonance where there were so many things that were going right, and certainly the numbers, user numbers, revenue numbers. We were sort of accidentally cash flow positive maybe a year after launching. It was also clear that winter was coming, or that things weren’t exactly as they seemed.

[...] The start of the second chapter, 2015, I’d start to hear a louder set of critics [...] I’d been thinking for a long time like, All right, man, we’re really fighting wars on all these very disparate fronts. We’re with storage. We’re competing with the device to back up the device with photo sharing, or competing with Facebook, Snap, Instagram, Google, Apple. On productivity, we’re competing with Microsoft, and Google. And then, there’s a whole new cohort of companies like Slack.

And then, there’s this experience of one day I am standing on stage talking about how Carousel [a photo sharing app built by Dropbox], and Mailbox [an email client acquired by Dropbox in 2013 for a reported $100M], and everything are the future of the company.

Less than a year later, Google Photos launches. And not only does it provide a lot of the same value, and in many ways very inspired by what we had done, but they also gave you free unlimited storage for life. Not just photos, but video.

And so they just totally nuked our business model in ways that were bad enough in terms of just their obvious impact, but even worse because it was so easily anticipated.

So this became a very public, and personal embarrassment for me. How could we not have predicted that, or been out in front of that?

That’s what makes it such a valuable case study. Whereas the popular Dropbox narrative was ‘big mistake by Steve Jobs’ and ‘take on Goliath and win’, Houston himself arrived at the exact opposite conclusion:

The problem is that every incumbent is going to copy your product. They’re going to bundle it with their platforms, and then they’re going to kill the economics. And that was clearly what was going to happen with Google Photos. It was a very similar product experience bundled with Android, bundled with all of Google’s different touch points, and then free.

So that was problematic enough for Carousel, but I’m like, “Wait, this is going to happen with everything that we’re doing. Same thing with Mailbox.” I had even pitched the founders to join Dropbox by saying, “Look, you’re going to wake up tomorrow, and Gmail, and Apple Mail, and everything is just going to have these swipes and snoozes. The UI, it’s not a durable source of advantage. We’ll buy that problem from you.”

And that’s exactly what happened. So I’m like, “All right. Even in theory, how do we deal with this?”

How indeed.

Sustaining Innovation

We’ve already talked about the distinction between disruptive and sustaining innovations: While the popularity of disruption theory has made it seem like every advancement in technology is disruptive, most of them actually aren’t. Innovations that improve the existing dominant products – whether small like adding a fourth razor blade, or dramatic, like cellular carriers going from 3G to 4G – were what the late Clayton Christensen called sustaining innovations. They don’t drive incumbents into an innovator’s dilemma and so industry leaders don’t struggle with deciding to adopt these technologies. Even when incumbents move slowly, market structure hardly changes.

In contrast, with truly disruptive innovations – like the PC was to the IBM mainframe, or the iPhone to Microsoft Windows—adopting the new technology did not make sense for incumbents until it was too late.

Dropbox’s cloud storage service, meanwhile, wasn’t disruptive in relation to Apple or Google or Microsoft. It was a sustaining innovation. A feature, if you will.

Christensen had actually answered Houston’s “how do we deal with this” question – from The Innovator’s Solution (2003):

[...] Starting a new company with sustaining innovation isn’t necessarily a bad idea: Focused companies sometimes can develop new products more rapidly than larger firms because of the conflicts and distractions that broad scope often creates. The theory of disruption suggests, however, that once they have developed and established the viability of their superior product, entrepreneurs who have entered on a sustaining trajectory should turn around and sell out to one of the industry leaders behind them. If executed successfully, getting ahead of the leaders on the sustaining curve and then selling out quickly can be a straightforward way to make an attractive financial return [...]

A sustaining-technology strategy is not a viable way to build new-growth businesses, however. If you create and attempt to sell a better product into an established market to capture established competitors’ best customers, the competitors will be motivated to fight rather than to flee.

As an example, Christensen writes that National Cash Register (NCR) was so late to the shift from electromechanical to electronic cash registers that its product revenue actually dropped to zero for a year; even so, its sales force was able to quickly win the market back once NCR finally shipped its own electronic register. It was a sustaining innovation, one that couldn’t enable the displacement of an incumbent (as slow-moving as NCR was).

That also aligns with what Houston described on Lenny’s podcast: the established big tech companies fought, rather than fled. Even as Apple, Google, and Microsoft launched their own cloud-based storage services years after Dropbox, they still boxed it into a niche. Celebrating Dropbox as proof that Jobs was wrong only compounds the widespread confusion about what disruption actually is.

Houston had a chance to follow Christensen’s advice, when the industry leader invited him to Cupertino and made an offer. Had that “high nine-digit sum” in 2009 been paid in Apple stock and held until today, it would be worth multiples of what Dropbox is currently worth.

Someone who had read Christensen was Steve Jobs. According to his biographer, Walter Isaacson, he was deeply influenced by The Innovator’s Dilemma3. It was the only business book on the list of books that shaped him. So I can sympathize with Jobs getting angry at Houston’s refusal to sell. To him, the idea of trying to grow Dropbox into a large independent company genuinely did not make sense.

Dropbox did carve out and protect a real business: about 18 million paying users, sticking with Dropbox – even as cloud storage was being commoditized – probably due to inertia and switching costs. But it couldn’t grow beyond that niche. The lion’s share of this market value went to the big tech incumbents, who simply bundled the feature into their distribution channels: products that were already used by many more than 18 million customers.

So that’s the first takeaway from Dropbox: Steve Jobs wasn’t wrong.

To be clear, Houston and Dropbox deserve enormous credit for the initial success; it took real talent and hard work. What’s unfortunate, however, is the 10-15 years that followed, in which almost no shareholder value was created. That was the result of a misguided strategy, downstream of a lesson Houston himself articulated, yet refused to accept.

We’ll explore that in the next post.

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Disclaimer: Not financial advice. This post is for educational and general purposes only and should not be relied upon for investment decisions.

Harvard and MIT are located in Cambridge (across the river from Boston), to be exact.

Dropbox went public in March 2018 for about $9B, shot up to almost $12B on its first trading day, and closed around $10B.

Jobs was influenced by Christensen’s 1997 book, The Innovator’s Dilemma, while the quote above is from his second book, The Innovator’s Solution (2003), where he shared more insights from his research.